By Ray Birch
BIRMINGHAM, Ala.—As some CUs experience a decline in auto lending volume as rates rise, can asset protection product sales make up for some of the revenue loss?
The sales can help, according to one asset protection expert, who said some savvy credit unions are not only using the products to soften the blow of lower lending volume, but to also hold rates down slightly.
Mark Edmundson, VP of independent and financial sales with Protective Asset Protection, told CUToday.info market conditions are conducive to more sales of these products, but only for those credit unions that take some key steps.
“CUs are actually strategically pulling back on auto loans right now due to how many they already have on the books from the last few years, even though overall CU market share is growing,” explained Edmundson.
Feeling the Squeeze
As CUToday.info reported, in an effort to keep the auto lending pipeline flowing, many credit unions were putting too many low-rate vehicle loans on their books as interest rates rose and are now paying the price as net interest margins shrink. That has prompted many of the same organizations to reprice their auto loans upward to current market levels, often in a move to slow down auto lending.
Edmundson said credit unions that have watched their auto lending dollars slide have placed more attention on sales of vehicle service contracts, gap insurance and limited warranties.
“Some credit unions are beginning to realize that income from these product sales can bring in enough to offset higher loan rates and therefore lower volume,” said Edmundson. “However, ensuring that individual loan officers understand the impact can be a challenge. We find that educational programs for CUs and their employees are important so they can fully understand the benefits to their organization as well as their members.”
Staff Need to Get Up to Speed
Edmundson said it’s imperative lending staff need to be up to speed on several market factors.
“While they are not unaware of the high costs of new and used cars today, the lending staff has to gain a greater understanding of exactly what the borrower is facing today,” explained Edmundson. “The F&I staff at dealerships know all about this. Individuals at the credit union that are offering these products are sometimes very removed from the auto market. They might be unaware of the high cost of auto repairs and have a bit of sticker shock themselves. Some might not even own a vehicle.
“Remember, they are not car people like F&I/business managers at dealerships, and to sell these products they need more knowledge here, and that means some training.”
What also is needed, and more credit unions are realizing this, according to Edmundson, is borrowers must be given the option to add extended warranties, gap insurance and more to their loan as they work online to complete the loan process.
“Some are making these sales available online in a self-service style,” said Edmundson. “Others are having more in-depth conversations with members.”
Mark Edmundson
Working in CUs’ Favor
Credit unions have something else on their side, he said.
“Lower loan volume means more time available to spend with each borrower,” Edmundson stated. “This is in stark contrast to 2021 and 2022, where loan volumes were very high, and many CUs were short staffed.”
How much credit unions make from the sale of asset protection products is determined by more than just their commission per product sale, emphasized Edmundson.
“Income is set only by credit union preference and is affected by many factors,” he said. “The most important factor is member value. Credit unions make usually a few hundred dollars per sale of these products. However, CUs also look at paid claims as a measure of income, just not in the typical sense. Any dollars put towards maintaining loan assets is positive. Gap and depreciation protection typically can range from $200-$400, with mechanical breakdown protection (MBP) often ranging more from $200-$250.”
Edmundson said he is aware of some credit unions using the non-interest income to help fund below-market rates.”
‘Continuing to Climb’
Edmundson added that sales of asset protection products are becoming even more important for credit unions and their members.
“Auto repair costs are continuing to climb, up 23% from last year, according to the US Bureau of Labor Statistics,” said Edmundson. “This is four times faster than inflation and means that it is increasingly expensive to maintain a vehicle. When coupled with other inflationary pressures, the need for protection is crucial in today’s market. Auto values are also falling after unprecedented appreciation during the pandemic. This means more vehicles are declared a total loss.
“On top of that the employment market is tightening up. More members face job layoffs and loss of benefits. All of these pressures together make the need for coverage like MBP, GAP and debt protection increasingly important.”